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Self Employed Guide Aspiring Entrepreneurs

A Self Employed Guide For Aspiring Entrepreneurs

by constructaquote - 23 December 2016


If you are contemplating working for yourself, we have a self-employed guide to get you started – from understanding the advantages and disadvantages of running your own business, to mastering the tax and financial aspects of self-employment.

Shall I start my own business?

There are lots of reasons to work for yourself: You answer to no one, have more flexibility and, based on your field, you might be in a position to charge a bigger fee than the wages you would earn working for someone else. However, there are drawbacks as well, and when you are considering self-employment there is much to take on board.

Am I suited to self-employment?

There are good things and bad things about working for yourself, and when you are weighing that up against getting a regular job, there are several factors you should consider, such as:

  1. Do you know how you will obtain customers or clients?
  2. Can you access any start-up capital?
  3. Can you deal with any periods of limited income?
  4. Are you happy to oversee your own business affairs, for instance, monitoring cash flow, maintaining detailed records and filling in tax returns?
  5. How do you feel about foregoing employee benefits, for instance, sick pay, holiday pay and company pension contributions?
  6. Will you miss working with other people, if you are self-employed?
  7. Do you have an office where you can work, along with the equipment you require or have you got the funds to purchase it?
  8. Are there any major events on the horizon to factor in, for instance, a wedding, house move or new child?

The Benefits of Working for Yourself

There are lots of advantages to self-employment, including:

  • You have greater control and flexibility, so it might be simpler to schedule your work duties around other responsibilities and commitments, such as childcare.
  • You can do more varied work because you might be working on numerous projects for several clients at the same time.
  • You can let your creative juices flow, while you expand your business.
  • Some costs are deductible – for instance utility and travel bills, from the income you make when you are completing your tax returns.
  • You might be able to make more cash because daily earnings for the self-employed are usually far higher than regular wages.
  • You may to be able to stop commuting because you will probably work from home, or at your own office.

The Drawbacks of Self-Employment

It is vital to factor in the cons of self-employment as well, more specifically the costs and risks that accompany working for yourself, for instance:

  • Obtaining clients, or entering the market, can be a challenge at first.
  • You will probably require some start-up capital, so having access to this money initially is important.
  • You do not have a guaranteed income, so often it is difficult to stay abreast of mortgage or rent payments, living costs and loan payments.
  • The success or failure of your venture is in your hands, so you do not have much support if anything goes wrong.
  • If you go on vacation or cannot work due to illness, you will not earn any money.
  • Often, it is harder for self-employed people to rent property, get a loan or take out a mortgage.
  • When you work for yourself, it is hard to separate your professional life from your personal life and to achieve a positive work/life balance.
  • If you work by yourself a lot, it can feel isolating to be self-employed.
  • You have to manage the administrative aspect of your business, such as bookkeeping and adhering to regulations.

Working for Yourself Initially

Once you become self-employed, you have to do several things, such as for inform HMRC that you are working for yourself for tax reasons. Also, you have to consider the structure of your business (which affects the paperwork you will have to complete) and sort out your insurance.

Checklist for Becoming Self Employed

Effectively, after you become self-employed, you are establishing a business, although you may not regard it as such. Consequently, you have to determine the structure of your business.

In a previous blog we have written about how to become a sole trader – normally the easiest business structure to select when you opt for self-employment. Nonetheless, you might decide to set up a limited company instead.

Setting up a Limited Company

When incorporating a limited company, you will have to do various things, such as register with Companies House, draw up an association memorandum, and pay corporation tax.

Becoming a Sole Trader

In the United Kingdom, if you are becoming self-employed, here are a few of the tasks you should complete:

Inform HMRC that you are self-employed. This way, they will know that you have to pay tax via self-assessment, along with Class Four and Class two National Insurance contributions. Visit the government’s website to sign up, or read our article about HMRC and becoming a sole trader for further details.

Get a bank account for your business. If you do not know which provider to use, do some research or use a financial comparison site to look at the different rates and benefits available to you.

Develop a procedure for documenting your profits and proof of your business costs; doing this will ensure that it is far easier to complete your tax returns for HMRC.

If you will work at home, read your mortgage contract or tenancy contract to check that you are not breaching any conditions. You might have to inform your mortgage lender or landlord.

Arrange your insurance policies. Public liability insurance and professional indemnity insurance are the primary forms of insurance to sort out, however, there are many other types as well and if you intend to employ people, you normally require employer’s liability insurance. If you want to learn more about the different business insurances available please see our ultimate guides to learn more.

It’s never too late to plan for your pension.  As a sole trader you will not be contributing to a normal pension any longer, therefore it is wise to arrange a private pension. This way, you can still put cash aside for when you retire. While you will forgo the benefits of employer contributions, you still receive contributions from the government into your pension via tax relief.

Calculating the Correct tax Contributions for Self Employed People

The amount of tax you pay when self-employed depends on the amount of money you have earned, and the ‘permissible costs’ you have incurred through running your business. Some business costs can be deducted from the money you earn when you are working out your taxable profits.

The tax bands and tax-free allowance are identical for employed and self-employed people. Therefore, for 2016-2017, you can earn as much as £11,000 prior to paying tax, and then you will pay the basic twenty percent income tax rate on earnings up to £43,000. For income above £43,000, the higher forty percent rate applies, and forty-five percent is the rate for income above £150,000.

Being Self Employed While Working for another Company

Naturally, you might decide to become self-employed on a part-time basis and carry on working for someone else for the remainder of the week. If you do this, it means that you are both employed and self-employed, and you will pay tax via self-assessment and through PAYE.

Also, you might be self-employed, while only working for a single company (for instance, if you have one big client). In this instance, HMRC will want to ensure that your client is not just working with you on a freelance basis, to avoid having to pay you National Insurance and give you employment rights. Normally, to be classed as self-employed, you require control over where and when you work and you should be paid after you issue invoices. Visit the government’s website or contact an accountant if you are unsure.

Getting a Mortgage if you are Self Employed

One drawback to self-employment is that getting a mortgage can be harder, however, it is achievable.

When employed people apply for mortgages, the lenders normally confirm their income by requesting bank statements and payslips. If you work for yourself, you will normally have to show your business accounts and self-assessment tax returns

Frequently, lenders request two to three years’ worth of accounts; therefore you might be unable to receive a mortgage if you have recently started working for yourself.

Typically, lenders look at your average income during the past few years, to work out how much they are prepared to lend you. Also, they might ask to look at other paperwork – such as a business plan – to give them confidence that you will be capable of repaying the mortgage.

As a self-employed person, what am I allowed to claim for?

Permissible Expenses for Self Employed People:

With regards to what you can deduct from what you earn when you are calculating your taxable self-employed profit, the list features some utility bills (assuming you work at home), business insurance, office expenses, business travel and stock. Read the guidance on the government’s website closely, however, because you might fall foul of HMRC if you deduct something that is not a permissible cost, or if you have no proof of the cost.

Benefits for Self-Employed People:

Based on specific variables, you might be allowed to receive some benefits. If you work for yourself and do not earn much money, you might qualify for working tax credit or income support, however, the former is being substituted for universal credit. Visit the government’s website to use one of their benefits calculators.

Tax Credits for Self Employed People:

You are eligible for working tax credit if you are self-employed; however, in April 2015 there was a change to the rules. Now, people who claim this type of tax credit have to prove that they are trading commercially, with the intention of earning money, and that this work is regular, ongoing and structured. There are more details on the rules in this briefing. Visit the government’s website to find out more about your eligibility.

Housing Benefit for Self Employed People:

In addition, you might qualify for council tax reductions and housing benefit if you work for yourself and are on a low income. When calculating whether you qualify for benefits such as housing benefit, the council might ask to look at your business accounts relating to the previous financial year. Alternatively, if you have yet to begin trading, the council might ask for a forecast.

Grants for Self Employed People:

When you become self-employed, you might be eligible for a government grant known as the New Enterprise Allowance. You could qualify if your partner or yourself have received an employment allowance or jobseeker’s allowance, if you are a single parent, disabled or sick, or if you have received income support. This type of allowance consists of weekly payments that claimants can receive for as long as twenty-six weeks. £1,274 is the maximum amount that can be claimed.